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Retail lending took off in the past decade. In the next 10 years, it will come of age.

twitter-logoAnand Adhikari | Print Edition: December 27, 2009

December 18, 2020. Location: A remote village in Maharashtra. Prakash Shinde, a lad in his mid-20s, is just through with his home loan application. He did it all with a handheld device. The bank just needed his UIN (Unique Identification Number) and a "credit score" from a credit bureau that has the credit history of countless borrowers. Shinde's score of 850 is good enough to get him another loan. Only last year, the alumnus of the five-yearold IIM Satara, who is now a team leader at a rural call centre, had borrowed to finance the purchase of the latest Volkswagen sedan. But what about the rising levels of indebtedness? A CEO of a large private sector bank recently pointed out in his quarterly mobile video conference with business journalists that household debt as a proportion of disposable income is over 150 per cent in the UK and the US. In India, it is 50 per cent, although it's up from 10-15 per cent in 2009-10. That retail banking won't enter bubble territory is virtually assured, courtesy the low interest rate regime — home loans at 5-6 per cent aren't quite burning holes in borrowers' pockets.

Such a scenario 10 years down the line may not draw gasps of astonishment from city slickers, who don't think twice before entering an ATM or applying for a loan to fund a holiday. That's because the retail lending boom in urban India has been in their face for some time now. And that's been largely thanks to the efforts early on in the decade of the likes of K.V. Kamath, the recently-retired Managing Director and CEO of ICICI Bank.

Kamath flagged off a retail banking thrust 10 years ago and in the process transformed ICICI from a development financial institution into a full-fledged bank (by merging the institution and the seven-year-old bank). "The entry of banks into retail in the last decade coincided with the absence of an opportunity in corporate banking," explains Paresh Sukthankar, Executive Director, HDFC Bank.

The stage is now set for the next big leap: To take retail products and services to consumers upcountry. Talk to Kamath's successor, Chanda Kochhar, and she'll tell you that Indian banks have only scratched the surface of consumer banking. "The penetration of retail banking will only become deeper," she says. The initial thrust was on the top 20 cities. Today, it has expanded to the top 60, and in future will percolate to smaller towns and villages. "We are seeing more and more smaller cities and towns — Tier II, Tier III and even Tier IV— getting more active," adds Kochhar.

Currently, it would seem like banks have topped out in consumer lending. For instance, for two of the biggest private sector banks in the country, ICICI Bank and HDFC Bank, retail advances as a share of total advances stand at 48-50 per cent and 58-60 per cent, respectively. Armed with low-cost deposits, an expansive branch network and technology, the new-generation private sector banks gained an edge over non-banking finance companies, housing finance firms and even foreign banks (which, don't forget, were the pioneers in credit cards and auto loans).

 Even public sector monolith State Bank of India has of late revved up its retail act, with retail advances hovering around the 25-27 per cent mark currently. The dual advantage of low-cost deposits and a wide distribution network are holding the public sector brigade in good stead in their retail surge.

2009-2009 FLASHBACK
Share of retail loans in banks' total loans jumped from 5% to 22%Share of retail loans to rise further to 35% in banks' total loans
Home loan outstanding rose from Rs 14,100 crore to Rs 2,63,235 crore Mobile banking to expand rapidly in urban and rural areas


Yet, if you consider the entire banking universe, retail loans account for just 22 per cent (with corporate lending making up the rest). Whilst this is a marked improvement from what the figure was at the beginning of the decade (just 5 per cent), there's little doubt that the retail bandwagon has a long way to roll. Consider some numbers. Reserve Bank data reveals that housing loans account for the bulk of banks' retail portfolio, at 44 per cent. Yet, when you look at mortgages' share as a percentage of GDP, it is just 7 per cent in India as against 62 per cent in the US, 37 per cent in Europe and 17 per cent in China. If you look at the overall retail pie as a percentage of GDP, that's also relatively tiny at 10 per cent. For the US it is 90 per cent, and for China 20 per cent.

A Citibank branch in Mumbai
All those numbers can only improve. Bankers expect the retail pie to grow to 30-35 per cent by 2020. From the banks' point of view, that will be just one of the engines of growth. The other will be corporate banking, which was a bit subdued in the past decade.

If the retail lending pie is expected to expand, it's not just because of a similar trend in the West and in other developed markets. There are some fundamental reasons for that shift. For one, two-thirds of the population is under 35, and more and more of this group is getting educated, working and inclined to spend. What's more, this population with an increasing disposable income isn't just confined to the metros, but can also be found in smaller towns.

At the same time, credit infrastructure like credit bureaus is making it easier for banks to pin down defaulters and chase "good" customers. Finally, as Indian interest rates align with softer global interest rates, the interest burden will reduce and encourage borrowing. In fact, the retail upsurge in the past decade coincided with falling interest rates—from 16-17 per cent in the '90s to almost single digits by 2003-04. If, or rather when, rates fall even further, more borrowers will join the party.

Remember, too, that retail banking is not all about retail assets (homes and cars), but also about liabilities like low-cost savings and current account deposits. A number of banks are focussing on building strong retail liabilities franchise even as they woo the consumer with loan products. Maintaining the balance is crucial, as recent experience has shown; banks with a high exposure to unsecured loans (like credit cards and personal loans) got burned—although they stand to gain from higher interest rates on these loan products, the risk of default is higher, too. Since then many banks have slowed down in segments like personal loan, two-wheeler loans and also credit cards. "Many banks are tightening their credit standards," says a head of a credit rating agency.

Clearly, the first decade of retail banking had its lessons. Just one of them: Launching innovative retail products is fine, but banks also need to verify if this is what the customer actually needs. "The focus is back on the customer-centric model," says Sukthankar. The branch has once again become the focal point—not just to collect deposits but also cross-sell other products by leveraging relationships with customers. Retail banking is still evolving, and there will be many more lessons in store as bankers enter uncharted territory in the hinterlands. The mouthwatering prospect of tapping a virgin customer base will have to be tempered with risk-mitigation measures which ensure that this huge opportunity thrown up, courtesy demographics and increasing purchasing power, doesn't prove to be a millstone around the neck of Indian banking.

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